IACCM research has pointed to the fact that disagreement over scope and goals is the primary issue underlying claims and disputes.
At today’s IACCM member meeting in Paris, speakers from law firm DLA Piper expanded on that with some observations regarding ‘clarity of intent’. They highlighted a number of recurrent factors that underlie disagreements and disputes:
- Recycling of old contracts. Business groups may either simply select an old template which may either not include relevant or updated terms, or they may use an agreement that was actually designed for a different purpose or relationship.
- ‘Renewing’ an expired agreement. If companies have been working together for some time, it is easy to continue issuing purchase or work orders that either implicitly or explicitly relate to an ‘expired’ agreement. Again, this may be missing key terms – for example, changes of regulation or new internal policies – or it may be an entirely different type of project or acquisition.
- Use of clauses from another jurisdiction. Rather than go to the time and expense of checking the applicability of corporate standards, there can be a tendency to use tried and tested clauses which may not work in the context of a foreign jurisdiction.
- Poor version control. The intent may be confused not only between the parties, but also within the parties. Often it is hard to work out what is the ‘final’ version, especially if there have been extensive on-going changes .
- Multiplicity of documents. Increasingly there are very long contracts with many supplements, attachments, appendices, schedules … with many different people drafting them, there is often weakness in naming conventions, so even if there is an order of precedence clause, it may be unclear which category a particular document falls into. And then there are emails, which often prove critical in determining intent, but are not formally embraced by ‘the contract’ at all.
- Last, but not least, is when the contract has been lost!
I thought this was a useful list of things to consider when seeking to protect against the risk of disagreement over intent. Maybe you have other causes you would like to add.
IACCM surveys tell us that many contracts and commercial practitioners work from home. They also confirm that flexibility over location, working hours and conditions are of major importance when selecting or remaining with an employer. It is clear that such benefits significantly reduce the importance of traditional drivers, such as salary.
The cost advantages for an employer are obvious – a major reduction in fixed facilities and their operating expense, the possibility to reduce travel costs by having people located within their territory etc. But are their disadvantages? In particular, do creativity and learning suffer?
That appears to be the conclusion reached by Yahoo, which has announced that by the middle of this year it plans to have all its staff working from office facilities. In an attack on this concept, Jeanne Roue-Taylor points to the irony of its adoption by a web-based company that advocates remote working.
I do have some sympathy with Yahoo. it does seem to me that the interchange of ideas and experiences suffers in a virtual environment. Perhaps if we are working within a dedicated development team, that may not be the case. But for individuals who are really busy performing their daily tasks, the casual conversations that occur in a workplace become a luxury. Cross-learning and experience exchange become far harder to achieve.
Perhaps the answer depends in part on the nature of work being performed. It would be interesting to see whether there is any correlation between the extent of home-working and the extent of innovation within the business sector.
Last week I was talking with an attorney at one of the top London law firms. He made the observation that ‘data centers lie at the heart of the new economy’.
it strikes me that the corollary of this is that those who own or manage those data centers – and consciously work on disseminating data that is of value to users – will be the beneficiaries of that economy.
Contracts – and the contracting process – offer a wealth of data, yet today it is typically not consolidated, let alone mined. There is a remarkable opening for those with the imagination to support data consolidation and mining, who commit to enabling others rather than acting purely as a point of control.
This is a far cry from where most contracts and commercial groups stand today. For example, in a recent roundtable discussion on ‘big data’, most of the contracts and legal executives protested that they are still too busy building systems to capture all their contracts; until then, they cannot focus on these grand ideas of analytics and using contracts as a driver for business performance.
I believe this is entirely the wrong focus. if they set the vision of contracting as a value-add data center, then issues such as compliance will become obvious imperatives. And the contracts function will be positioned to deliver real and sustainable business value as the driver of commercial competence.
In a blog on Successful Workplace, Chris Taylor asks the question ‘Just who owns the customer, anyway?’
Chris goes on to observe the growing influence of technology in data gathering and assessment and how this is transforming the way that relationships are evaluated and managed. No longer do they depend on the appointment of a dedicated account manager or account team to operate as internal analysts and champions. Increasingly, the business has objective data, auto alerts and mechanized segmentation to assist its decisions about the value of any trading relationship.
This enables the customer interface to be far more fluid, based more on the nature of the topic. It reduces the need for a dedicated intermediary, whose role was in part to build ‘the relationship’, but in reality most time was spent researching opportunities, making connections and facilitating the right discussions. Automation eliminates the need for much of this activity – and is far more thorough and accurate in its targeting.
Certainly we should not discount the importance of the relational element. This can make a big difference to loyalty and trust. But some companies have already decided to dispense with this – for example, RBS (a large international bank) recently announced the elimination of its relationship managers for corporate clients.
For those in contracts or commercial management, this trend means that the old days of subservience to the account team may be drawing to a close. Already, many post-award contract managers find that they are often a key interface to the customer organization. Increasingly, there will be a need for practitioners to take a lead role both pre and post-award, depending on the nature of the issues and the specific customer interface.
The same factors actually apply with regard to supply-side relationships. Old assumptions that ‘the business’ owns the interface to its suppliers similarly make little sense. With the erosion of relationship management in general, those who anticipate an army of ‘Supplier Relationship Managers’ may be very wide of the mark. Account management is increasingly a discipline that focuses on data and analytics, rather than a job title.
Last week I was asked to present on the topic of ‘Contract compliance as a core competence’.
Compliance is not a new issue. It lies at the heart of all successful business because it relates to meeting commitments. So why has it become such a major item on the corporate agenda?
I believe the answer is because of trust – or in reality, the erosion of trust. This has been documented by a variety of researchers and it appears to be accelerating, especially with regard to the public view of corporations and politicians.
Some of this erosion is probably justified. Certainly modern societies have witnessed an erosion of loyalty and a growth in transparency, revealing many previously hidden secrets. Behind this lies the networked world, which has severed long-standing relationships and driven a culture of low-cost acquisition. Globalization has introduced many challenges regarding controls, ethical standards, effective jurisdiction – the list goes on.
In their eagerness to redeem their own reputation and to ensure some continued relevance, politicians have added to the confusion and mistrust by rushing to introduce or threaten new regulation, helping to create a compliance nightmare. Indeed, Stephen Covey estimates the cost to US business associated with this ‘lack of trust’ is $1.1 trillion annually – and that estimate was made in 2004!
Other research has found that the biggest single factor in engendering trust is a visible commitment to ethical business practices – though sadly it often seems that ‘success’ and ‘ethics’ become confused, when you consider how many highly admired companies have fallen from grace when the source of their success unravels.
An article in Psychology Today seemed to capture the essence of what a compliance system should be trying to achieve when it observed that “Trust is based on the perception that efforts between parties will be reciprocated, reactions will be predictable and produce a sense of security for the parties”.
So what part does the contract and contracting process play in creating this trust environment? Today, I would suggest it is frequently very little. In fact, the terms of most contracts and the way they are negotiated tends rather to reinforce the absence of trust through its tendency to be adversarial in style and focused on the terms and conditions that essentially say ‘I don’t trust you’.
It seems to me that our contracting process has to become far more expansive in its thinking. As a start, it might seek to better understand the likely causes of failure (non-compliance) and seek to address their root cause, both internally and externally. As a simple example, failure to achieve committed outcomes could be a result of lack of integrity or could be attributable to lack of competence. But since we tend not to distinguish these characteristics, we do nothing specific to guard against them. When it comes to business exposure, I would deem absence of integrity to be in general far more serious than lack of competence. Competence I can correct or make up for; integrity I cannot.
Best practice compliance systems are those which are capable of distinguishing the types and severity of non-compliance and far more adaptive in their means of addressing lapses. In the end, we come back to the point that corporations have inflicted severe costs and damage on themselves by dismissing the value of long-term relationships built on trust and founded on integrity.
Will the European horsemeat scandal at last lead to a rebalance in procurement measurements?
Yesterday the debate turned to whether the food chain is being threatened by a focus on price. According to the head of one major retailer, it is the only basis on which business can be won.
Over the last couple of years, the voices calling for less focus on price and more on value and outcomes have increased in intensity. Many – including those within the Procurement profession – have grasped the negative effects of an unrelenting focus on input costs. This focus simply does not generate long-term cost reductions – and it results in many unwanted outcomes.
The European horsemeat crisis would be a rather ironic catalyst for change, but certainly welcome. The constant push for lower price as the only way to win contracts inevitably drives unscrupulous behavior. But which side truly lacks morality in this situation and how should we alter measurements to secure better results?
A second aspect of the horsemeat affair is that we are immediately into the blame game. This is also typical of poorly managed procurement systems, in which performance management is often a post-mortem rather than an active and collaborative discipline.
In an interesting example of the growing use of gainshare arrangements, the US courts have given clearance to an initiative covering more than 100 hospitals in New York.
The legal review was based on concerns that the proposed gainshare program might prove anti-competitive and to address these there is a high level of transparency in the overall process. The gainshare applies to physicians and awards will be based on their efficiency and effectiveness in the use of resources, both relative to others and to their own performance over time.
I find the program interesting because it demonstrates the power of technology in allowing us to think in new ways about undertaking benchmarks and measuring performance. As companies seek better ways to determine the relative value being provided by their internal and external providers, i believe we will see increased use of programs like this. An interesting question is who will sit behind their development – for example, industry bodies or associations, software companies, analysts, major consultancies, or a new breed of service providers focused on supplying the information that drives continuous improvement?
And for suppliers, what exactly does this trend mean in terms not only of rewards, but also with regard to their performance obligations and the customer’s termination rights?
With all the focus these days on compliance, it is probably no great surprise that there is growing interest in review and approval processes. Certainly it is a topic about which an increasing number of IACCM members are asking.
With today’s automation, you would think that it’s become easier to route bids or contracts for review. And on one level, you would be right. But of course, effective review depends on effective analysis of who must be involved. Before that can happen, there needs to be a thorough understanding of the possible risks to be considered and questions to be answered.
Executives are often frustrated by the lack of ‘commercialism’ within their organizations. On one level, this is about creativity and new ideas; on another it is about general business awareness and the ability to think laterally. It is in this latter context especially that many review processes are lacking. They fail to consider the wider array of possible interests and issues – and in consequence do not ask the right questions.
At IACCM, we advocate an approach that is based on stakeholder analysis. It certainly helps if you have a list of possible stakeholders because there really are potentially many of them – internal and external. For example, many contracts staff tend to think only in terms of the ‘core’ reviewers from groups such as legal or finance. They may recognize others – sales, product management, operations. But often they will overlook the many groups that could have an interest in the contract or relationship they are forming – shareholders, regulators, other customers, competitors, suppliers, distributors etc.
Other groups or professions that have coordinating responsibilities face a similar challenge. Project Management is one of these and we found this useful summary of their thoughts on stakeholder identification in a blog on Prince2.com. Here is an extract that offers some useful examples of the questions needed to support review and approval.
What are the top tips for identifying stakeholders?
Questions can help direct and prompt ideas in the brainstorming process. Here are a few: who is affected positively or negatively by the project; who gains and who loses from it; who wants it to succeed and who wants it to fail; who has the power to make the project succeed or fail; who makes the money decisions; who are the positive and negative opinion leaders; who exercises influence over other stakeholders; who could solve particular problems; who controls or provides or procures resources or facilities; who has the special skills needed by the project?
How should you classify your collection?
You can categorize stakeholders in different groups, such as users and beneficiaries or governance and regulators. A stakeholder map can be an invaluable way to record who they are and their interest in the project. It’s also worth working out which are the key and which the minor stakeholders remembering that, as always, things can change – and that they usually will!
The reason that automation has not completely answered the need for review and approval is that an effective process demands active thought and intelligence. While rules and principles can be automated and routing can certainly be made far more efficient, there is also a need for analysis to ensure the specific opportunity has resulted in proper consideration of the potential commercial implications. It is a talent that any proficient contracts or commercial professional must have.
In a lead article, The Economist recently highlighted the Nordic countries and suggested they may be ‘the next supermodel’. Its Special Report then goes on to expand on the reasons for this focus. I was struck by the report because in my view, the Nordics are also leading-edge when it comes to contract and commercial practices.
The Nordic countries had their financial collapse some years before other Western economies. Their collapse came mostly in the 1990s, when the levels of taxation and public expenditure became unsustainable. Having gone through harsh reform in order to recover, they were left relatively unscathed by the financial crisis of 2008.
The Economist outlines many aspects of the social and economic reforms since that time and describes the egalitarian, consensual society that supports high levels of employment and a readiness to embrace change and innovation. The article concludes “The world will be studying the Nordic model for years to come”.
IACCM has strong membership within the Nordic countries and links to a number of universities and business schools (including some that come in for special mention in the Economist article). This is because the Nordics are also a center for innovation in contract management and a leading force behind ‘proactive law’. In line with their generally collaborative spirit, the Nordic countries have grasped that contracts are important and that, in general, they need to be balanced and fair – a framework that assists in building trust and governance. In addition, Scandinavia is leading in work on ‘visualization in contracts’ – that is, making it easier for users to understand them.
So if the Nordics truly do represent the shape of things to come in aspects of social and business organization, it is good to see that they take contract management so seriously and appreciate its contribution to improved success in the global market. It renews my confidence that the IACCM global community is on the right track!
Commitment Matters 